How to Help Your Adult Children Establish Strong Credit
Today’s millennials and Generation Z face starkly different financial realities than their parents did at their age. As a parent of a young adult, how can you help your children understand their financial options to build a foundation for their futures? The first step may be to appreciate where they’re coming from and how their attitudes may differ from yours. Your assumptions about finances based on your experience at their age may no longer hold true. Once you understand your millennial children’s situation, you may better be equipped to help them make sound financial decisions.
Consider these recent findings about millennials and credit from VantageScore Solutions before advising your adult children.
1. Millennials and Gen Z young adults face hurdles when judged by traditional credit scoring methods
Now more than ever, credit scores impact everything from getting an apartment or home, acquiring loans with decent interest rates and more. A poor credit score makes it harder for young adults to get ahead. Because standard credit scoring models assess the length of time credit accounts are maintained and the number of accounts, millennials and their younger siblings are at an immediate disadvantage. It takes longer for them to build a credit history worthy of decent interest rates and large loans such as a home mortgage.
What you can do: Explain that establishing good credit now will increase their ability to borrow later, though it may take a couple of years to establish that history before they’re considered creditworthy of assuming substantial debt such as a mortgage. Help them find a good revolving credit account by checking out sites that assess credit cards in terms of interest rates, annual fee (if any), rewards programs and more.
2. Millennials are averse to debt
Most millennials carry higher amounts of student loan debt than their parents did. As a result, they are reluctant to acquire more debt. For this reason, they may have fewer revolving credit accounts. This behavior is actually smarter and less financially risky on their part, but it results in them having a “thin file,” the term for a history with three or fewer credit accounts. In fact, many thin-file millennials have average income levels and assets similar to their thicker-file counterparts. And because they do have the income, they actually have the capacity to handle new accounts. Fortunately, VantageScore Solutions, a rival to the FICO score, includes trended credit data. According to their recent online article, Millennial Credit Habits: A Major Shift, trended data attributions “change the focus of credit scoring models to better understand actual credit management behaviors over time versus static snapshots.” In other words, it takes into account the typical millennial’s prudent behavior when it comes to acquiring new debt. Lenders with this understanding of the bigger picture will be more likely to give your millennials the opportunity to borrow.
What you can do: Tell your adult children to utilize credit in a safe and sound manner, and to apply for new credit carefully in order to build a more robust credit history. Stress that they should never spend more on the card than they can afford. Setting up automatic minimum payments on cards can help them avoid late payments, but also advise that they can — and should — pay more than the minimum each month, and in full whenever possible.
3. Millennials are likely to put off major milestones
Because of millennials’ reluctance to assume debt, they may put off major life events such as buying a home until their student loans are paid off. Recent data from VantageScore “shows (millennials) are writing their own story when it comes to using credit,” says the company’s president, Barrett Burns. Some lenders won’t loan to would-be borrowers with thin credit histories, while others offer them more expensive subprime-like products. But the research found that millennials “are anything but conventional.” VantageScore credit scores, which take these behavioral differences into account, are used by lenders, landlords, utility companies, telecom companies and many others to determine creditworthiness. However, many mortgage lenders may be missing out on thousands of potential clients by relying solely on traditional scoring models.
What you can do: Reassure your adult children that, while some larger life goals may seem out of reach now, their responsible actions such as paying down their student loans will pay off, sooner than they might expect. Encourage them to make more than minimum payments on their student loans to save on interest and eradicate that debt sooner.
So what’s the upshot? While you may be eager to see your adult children settling down in a home filled with grandchildren, they are actually trying hard to put their financial ducks in a row. You can help by advising them on smart tactics to manage their money and improve their credit scores.